Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Is SICAD A Radical Change In How The Economy Is Managed??

I have been pondering about the new foreign exchange auction system SICAD since it was first discussed. Besides all of its weirdness, what I have had the toughest time dealing with is very simple:

Why?

Why the rush? Why the second price for the US dollar even if it is a State secret? Why before the election? Why take the risk? Why devote so much time to it?

It can’t be to get more Bolivars. It can’t be to lower the black rate. It can’t be to reduce shortages.

And now that one auction has taken place and Bolivars reportedly assigned to a range between Bs. 12.5 and Bs. 18 per US$, I am left with only one theory:

Someone sat down with Maduro and explained to him that what Giordani wanted was a sure path to self destruction and convinced Maduro to change the whole system and manage the economy differently. And this someone convinced him to start the process ASAP for the good of the economy he will have to manage if he wins. And he decided to be his own man, even if Giordani is still around.

Thus, I think we are in the face of a radical change on how the Government plans to manage the economy. Maduro may remain radical in his political speech, but the moves suggest he will be more pragmatic on economic matters. And the changes in CADIVI seem to confirm this, he switched two Chavez/Giordani guys for two 100% Merentes buddies. And we all know Merentes is more pragmatic and has been losing battle after battle with Giordani since 2010.

Which suggests that Giordani will be gone if Maduro wins, and hopefully someone better comes in.

I have to say this is a step in the right direction, maybe in a month the foreign exchange system will be unrecognizable.

Let’s hope I am right, it is the only explanation I can find for all the SICAD nuttiness and noise

Exporters can keep part of their dollars, but the decree establishing at what rate they exchange has not been changed. At US$ 200 per week (reportedly what will be sold next week also) we are talking about a 1 to 7 ratio approximately. My bet is that after April 14th is a whole new ball game if Maduro wins. This was more of an internal fight and the pragmatic wing imposed its ideas.

There is still one thing we don’t know and that is what proportion of dollars will be sold through this mechanism versus CADIVI. Only then will we know how much of a change this is.

BTW, are exporters still allowed to keep their dollars earnings, or at least a portion of them, for themselves? And when they do repatriate money do they do so at the official CADIVI rate or at this higher rate?

It is just a ponzi scheme…Nobody will get any $. You have to deposit in Bs now…when the merchandise arrive at the port , they will find a way to not recognize it. For 4 or six months they will get a lot of Bs without selling any $.
Next year they will device a new scheme. It is only “pure grass” o PURA PAJA.

Well, there has to be a downside. My understanding is that the Cubans have had enough of the basic stuff. They want to own homes, too. It also looks like Argentina is being forced to pay debts it owes. The future of the Bolivarian revolution is looking bumpy.

Still, the demand for dollars exceeds the supply. Inflation+shortages=double inflation stimulus, which in turn makes holding on to Bolivars a bad idea and =triple inflation stimulus. What is there to prevent run-away inflation?

The do: the Cuban Peso and the Cuban Convertible Peso (CUC). The CUC is pegged to the US dollar and can only be used for tourism. Cubans get pais in Pesos and they can only use Pesos to buy stuff. Tourist are forbidden to obtain and use Pesos, they can only spend CUCs. I am pretty sure many Cubans exposed to the tourist use and trade internally in CUCs, but they are not suppossed to do that.

Yes, Cuba has a fixed currency, the Peso, and a convertible they call the Chavito. They also charge a 10% predatory service charge for converting currencies. Cuba also has a thriving black market. So much for the Cuban-style revolution… actions speak louder!

Well, at least no one goes hungry over there. Basic staples are sold in Pesos at ridiculously cheap prices. And they get paid in Pesos ridiculously low wages. Those who are able to get their hands in CUCs (e.g., jineteras, taxi drives, babalaos, corrupt gov’t folk?) are able to buy luxury items.

Miguel, I buy the theory but I still can’t buy the timing. Is less than three weeks all that separates the country from Armageddon? Everything you say might be right and you can still wait until April-15 to implement the system. Also, since when they’ve cared for the good of the economy? If we go on that path, why don’t we just get rid of the bloody controls? I still don’t understand why they did such a move!

If the process is through bidding, with winners not anounced or bids not anounced, does anyone even know for sure if money changed hands or was not just circulated back in camp? Could this only be smoke and mirrors to give the impression that maduro will move forward with drastic changes to the economy? As noted, none of these moves will affect anything before the election. Only the impression that maduro is willing to make changes for improving the economy…something that chavez would not do. I think this is only a mirage.

My question is: if this is so (someone sat down with Maduro and explained what needs to be done to avoid economic disaster), then, is there someone who is in a position to do the same with regards to PDVSA? Reform of the BRV policy for ‘the goose that lays the golden eggs” is the other part of a sane economic/financial policy.

I agree, however, I also think Ramirez is aware of that and has fought Giordani’s bleeding of PDVSA. As to who talked to Maduro, it had to be one of the economists he has talked to about the Finance job or oil partners before commiting more money, i.e. the Chinese

If I am not mistaken, no one has mentioned that Venezuela is about to take charge of Mercosur precidency. Don’t you think this is playing an important role? The same people that endorse Venezuela to enter in Mercosur must be the ones that are trying to convince Maduro to make some “radical” changes in economic policy. Just guessing folks.

AHORA SI SE SUBIO LA GATA A LA VATEA.!!
It takes some time to get the grip over economics. It is not that easy.
The SICAD is just a method to ration the small amounts of dollars which are available to PDVSA or Central Bank, (the two trousers pockets of government oil revenues) for the sake of the argument, same thing. The main reason behind the deviation of real exchange rate from it melting point or equilibrium if you like, is not the volume of dollars produced by oil exports, but due to the exchange control; that control is there in force from February 2003 when the international reserves were 10.000, or when were 56800 in 2007, or 25000 today. Chavez established such exchange control to exert political control over citizens and their firms; Chavez dixit, February 24, 2003 the day after the exchange control was issued by government).
The CADIVI dollar, the cheap one, the CANTV dollar, the permute dollar, the SiITME and the parallel dollar, and the SICAD today, all of them are variations from the same theme, at the heart of it lies a predatory system based on the different prices one have pay to buy one dollar. The term, predation I am using here is the same used in financial economics. But I am not going to explain here, everyone knows what I am talking about. That predatory system was organized by government to extract purchase power from people and transfer it to government; very simple, government could access any amount of dollars at the CADIVI price to predate us which could bought dollars at prices far expensive in the permute and on the parallel markets. These markets were feed by government agencies, firms, banks, PDVSA, and merchant partners. More about this in my web site (only in Spanish), there is a note explaining it.
Finally, without any surprise, as expected, the both crises, the balance of payments and the fiscal one, the twin crises arrived, government expenditures in terms of GDP doubled in 12 years, external debt multiplied by three, Central Bank financed fiscal deficit during 5 long tears, nearly one time the GDP, but oil production dropped by one million MBD, of 33% of royalty plus taxes which government takes from oil exports, today only 13% if it is cashed by the treasury, only 1 MBD yields royalty of 33%, the reminder (Chinese and Japanese arrangements, Petrocaribe, Cuba, Argentina, and many others oil clients) , about 810.000 BD do not met any royalty. So if equilibrium has to be met, exchange control should me removed, the bolivar backs to fully convertibility, and the revolution to hell, as simple as that, otherwise, you have to go to a strong, discretional rationing system. SICAD fulfill these requirements, including make some believe it is good enough.
SICAD is at the heart of that predatory system to do the job, very convenient, some would extend their self-fulfilled prophecy, or guesses, but most of the demand for dollars will not get any, it has to be done at the predated price of 24/25 at “parallel market”. But the most important role for SICAD is to draw more bolivars to the treasury from the pockets of citizens and its firms; this time, between 13-15 Bs/dollar, double than the official rate. The rout is this one. PDVSA sell dollars it gets two time bolivars than the official rate of f 6.3 Bs/$. Be aware that PDVSA pays oil fiscal contribution, taxes and royalties with bolivars!!. Now you get what is going on.
I understand that some listened carefully Giordani words, when talking about the auction; he brought the name of late Prod Vickrey, Nobel Prize in Economics, which studied at large the auction system. Merentes a mathematician at the Central Bank, decided to modify Vickrey method, (of second highest bid) to an average of all bids, Merentes, of course knew was he was doing, I think Giordani does not understand anything about it. Allow me to be more precise, if you take the average of all bids, get one price, you will be at the heart of a discretionary rationing system, not an auction, so SITEC decide what to do with the small amount of available dollars at PDVSA or at Central Bank, same shit!.
So. it is that price closer to the equilibrium rate ? Well, it will depend, not of the price; but of the dynamic of government expenditure, the main variable behind the twins crisis I quoted at the beginning if this note, balance of payments and fiscal crisis, in other words on the fiscal deficit, accordingly with the political recurrence of goverment expenditure, this one marked by the redistributive factor, the life of the revolution. However, nobody knows if Maduro reverts all of that, as you suggest in your note, Octavio. We could end asking Maduro to take office until 2021!!!

Two issues adresses here 1) timing 2) fx policy. 1) Timing: not sure why now. A number of hypothesis surface i.e Giordani out after elections, real scarcity of goods which scares the sh-t out of govvie, pressures from large multinationals to shut down operations, a second avenue to assign dollars to large govvie supporters, difficult guess. On my view Merentes has a big hand in these as he never liked Sitme. 2) FX policy: agree with Miguel that an equilibrium exchange will be the natural and intended effect of this policy. Contrary to common wisdom, the govvie may not care much about inflation now, but it does to basic goods scarcity ( as Haussman put it “the worst form of inflation”)…thus started to deal with issue ASAP, assigning the first 200 palos tanda to large corps 1 per cent, who have a stronger impact in the economy. Now, where is this leading us? To some sort of Macro inflation. I do not get why wall st banks are cheering the move? Yes i get fiscal balance in bolivars, but real deficit and cash gap needs is in $ thus real balance sheet picture does not change. I would not link all this move to Giordani departure but rather to an urgent need to oxygen the $ economy.

Diablo, I disagree with your theory, the SICAD, devaluation Continuous System you’re after completing the destruction, to small and medium-Companies that are on the market, all pointing to the middle class, by their political sympathies, and explain that only 1% of the companies involved, and that the bid amounts were $ 200 million, and not publish the value of the new exchange rate change origuen Hidden giving or particiapantes names, the amounts demanded by them and your destination and use and their offers.
Diablo this is only accessible for transnational corporations, who have the muscle fianciaro RUSAD and to participate in international credit lines from their parent, what SMEs can have 80 thousand dollars available to pledge as security for a national bank to open International letter of credit?, by a 20-foot container, no devil, is financially unfeasible for any company SME.
The system will succumb to their own ineffectiveness, as we shall see, in the short term, this does not solve the escasees of commodities, or the dollar value down the black, as the dollar remains low and the new rate inacesibles a good% of companies, which proves that the government does not have the suficianetes amounts of dollars, I fear the coming weeks migararan to this new important mercadoun% tariff codes, considered by the Minister as required Super ultimately these the installation is a dam definitva Exchange, size and height Guri.

Wouldn’t the free market economic theory predict that the SICAD exchange rate would settle somewhat close to the black market rate of 23? Well, maybe it did. After all 18 is close to 23. Maybe in this case it is not what the market will bear but what the government would bear that the market bears.
The market economy dances fox trot with a meek government.

Not necessarily, if they offer 200 million a week, that is much more than what was being tradedin the black market, additionally, you may be willing o pay 15 for something for your businesss, but at 23 it may not make sense. Think about it, if all, cadivi plus sicad was at 23 consumption would collapse because people can not pay for things and there would be excessof dollars. The answer is the equilibrium free market rate is a weighted aveage of the amounts being done at each rate.

Miguel, there are also risks associated to black market trading. How can you know how much trading is occurring on the black market? Maybe you can tell us what you know about the impact of insufficient dollar supply to the economy in concrete terms.

On the other side of the story, availability of goods and inflation are having an impact as well, especially on low income and fixed income consumers. What is the likely outcome of this, and what are the available solutions?

That is why the volume cant be large, when people cant find 100k, volume is small, the supplier hasto be the Government, to me the only solution is to devalue to the point that consumption contracts to the size of available dollars, which seem to be what they will tryto do. With JG out of the picture. It is a newball game

However, there seems to be a concerted effort to black out any kind of parallel exchange. For one thing, internet sites publishing black market rates that I have been following have been disappearing, and the SICAD bid is kept secret. It appears to be an attempt to create a “stealth” exchange rate to keep the public stupid… and businesses in the dark… except for empty store shelves which represent the the hoarding of the oligarchy of the opposition.

In effect, the policy is focusing on what Chavismo does best, bullying and abuse of power. This keeps them in power, but it won’t turn the economy around. Afterall, a strong economy is not the intention of a Cuban style revolution, anyway.

“I have to say this is a step in the right direction, maybe in a month the foreign exchange system will be unrecognizable.”

Yes, you may be right. But using SICAD as your foreign exchange instrument you will unleash a torrent of inflationary pressures within 3 to 6 months. But, unlike a country such as Cyprus where 10% of peoples wealth was confiscated through bank deposits, Venezuelans will have their wealth decimated by an inflation rate of 50% or more. By September all of the ‘supposed’ economic gains for the poor of the 14 year Chavez era will be wiped-out, in a heart beat. Gone. A do-over. It’s 1998 again, with nothing to show for the largest influx of cash in Venezuela’s history. Nothing.

Reblogged this on danmillerinpanama and commented:
More from The Devil’s Excrement on the Venezuelan Bolivar Fuerte devaluation. It seems that the U.S. dollars that were auctioned off for Bolivars went for Bs. 12.5 and Bs. 18 per US$. That’s a pretty big range, but perhaps they think big in Venezuela. Good change? Bad change? It may even be for the better; it would be difficult for most anything to be for the worse, as the late lamented el Presidente himself demonstrated over the years.

Yes, I think they’re assuming that they already have 14-A election on their pocket and are playing the game for the mid-long term.

From that perspective, Easter is a perfect time to do it, just as Carnival was the perfect time for the first devaluation. Everybody is too busy enjoying the holidays to care about something as obscure as “Vickrey” auctions, letters of credit or whatnot.